Early Tumblr Investor Saw ‘Raw Talent,’ Capital Efficiency

One of Tumblr’s biggest fans is a venture capitalist who helped steer the blogging service from its earliest days to a deal to be acquired by Yahoo for $1.1 billion in cash.

Spark Capital

Bijan Sabet.

Bijan Sabet, a general partner at Spark Capital who is best known for leading the Boston firm’s investment in Twitter, said he first started using Tumblr when it was just one of several Web applications that founder and Chief Executive David Karp had developed while running a Web consulting company called Davidville.

Karp has “raw talent when it comes to design and user experience, and self-taught technical talent,” Sabet said in an interview Monday. With anything he built, “you could just tell it was a David Karp product.”

But Tumblr was what caught Sabet’s eye and he thought Karp should focus on a single product early on. Starting in the spring of 2007, Karp and Sabet spent several months talking about what it would take to turn Tumblr into a business before Karp, who was happy running his profitable, self-funded consultancy, agreed to go forward.

Spark and Union Square Ventures were among the earliest investors in the company and today are its largest venture shareholders, Sabet said, declining to disclose their ownership stakes. The two firms contributed to a $775,000 round in October 2007 and led a $4.5 million Series B round in December 2008. Tumblr has raised about $125 million from investors, who also include Greylock Partners, Insight Venture Partners, Menlo Ventures and Sequoia Capital. Its last round, in 2011, was said to be at an $800 million valuation.

What marked Tumblr from the start was its capital efficiency, operating with two people for the first 15 to 18 months and then four people for the next year. Karp concentrated on a series of constant improvements to perfect the Tumblr experience, Sabet said. Rather than trying to move the company quickly into the mainstream, the CEO was “more focused on delighting the users he had already signed up.”

Besides its slow, steady approach, another key to Tumblr’s success was its move from the Web, where it started, to mobile devices, Sabet said. “They were able to build a wonderful, compelling mobile experience in the last couple of years.” Well over half Tumblr’s users access the service via its mobile app, Sabet said.

Spark and Union Square, who are both Twitter investors, were in no rush to have Tumblr generate profits, although Sabet acknowledged that obviously is the ultimate goal. “We believe in profitable business models–I am a venture capitalist,” he said. Like Twitter, investors figured, Tumblr should concentrate first on building a big base of users.

“You’ve got to scale first and monetize second,” Sabet said.

The Tumblr acquisition will be Sabet’s second exit in a little over a year. In March 2012, Zynga acquired Spark-backed gaming company Omgpop for about $180 million. The company had raised about $16 million from investors.

Karp was one of the people who introduced Sabet to Omgpop founder Charles Forman. Sabet said the two companies had little in common except that both Karp and Forman have a “strong, strong affinity around design and technology.”

Write to Russ Garland at russell.garland@dowjones.com. Follow him on Twitter at @RussGarland

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